October Payrolls Moderate, Unemployment Ticks Up

The latest employment report from the U.S. Bureau of Labor Statistics (BLS) was more "trick" than "treat," with job growth coming in under already tamped down expectations and a slight increase in unemployment.

U.S. employers added 150,000 new jobs in October, after surging to a revised 297,000 new jobs in September. Economists anticipated moderation—around 170,000 to 180,000 new jobs—in employment growth after September's enormous gain, the largest in eight months.

"All of the key indicators in the October jobs report suggest that the economy is cooling, and the labor market is slackening," said Julia Pollak, chief economist at ZipRecruiter. "Job gains slowed to well below the 260,000 average for the year to date, and the prior two months' numbers were revised downwards by a combined 162,000."

Nick Bunker, economic research director for North America at the Indeed Hiring Lab, said that the report is consistent with both a mild loosening of the labor market on the way to a soft landing, and potentially the beginning of a more troubling downturn. "But it's important not to overreact," he said. "Anyone concerned that the labor market was heating back up should be reassured. This labor market is still cooling down, with slowing payroll gains and solid if unspectacular wage growth." 

Noah Yosif, lead labor economist at UKG, agreed, saying, "The days of explosive growth are gone, as the labor market shifts into healthier and more sustainable territory. In fact, I think we're going to be in a tight labor market for quite some time, and we're going to continue to see relatively low unemployment."

The U.S. labor market continues to demonstrate its resiliency, said Geno Cutolo, head of Adecco North America. "October's figures follow the phenomenon of the 'September surge' ", he said. "Many more employers are now starting to focus on hiring and onboarding for in-demand roles to help power the upcoming holiday season. We expect to see an acceleration of gains in key industries, such as hospitality and leisure, transportation, warehousing, and various customer care roles in the weeks ahead." 

Becky Frankiewicz, president and chief commercial officer of ManpowerGroup, said that the labor market is finding balance in many sectors, especially in blue collar and tech roles.

"The post-pandemic hiring frenzy and summer hiring warmth has cooled and companies are now holding onto employees," she said. "The tech sector is cooling from its hyper growth, although there's still demand for some highly skilled positions including app developers, cyber security experts and data analysts. The most in-demand functions remain steady, with most new roles posted in medical and health care, sales and IT."

Pollak said the report's numbers support the Federal Reserve's decision this week to pause interest rate hikes. "The good news is that this slowdown is not due to economic fundamentals, but rather due to careful orchestration by the Fed," she said. "If it turns out that the Fed and bond markets have gone too far, the Fed holds the keys to turning that around."

The central bank has opted not to raise interest rates at its past two meetings. Following October's jobs data, the probability of another rate hike in December is lowered. Rate cuts could even be on the table in 2024.

"The unprecedented rise in interest rates is being felt by businesses—especially small and medium-sized firms—as well as consumers," said Richard Wahlquist, chief executive officer at the American Staffing Association. "It should be clear to policymakers that continuing to raise interest rates will adversely impact future employment and economic growth."

Pollak said that employers are saying "they have many vacancies, they want to hire, and they want to expand. But high interest rates are holding them back. If rates start coming down next year, expect that pent-up demand for labor, transportation, building materials and a host of other inputs to be unleashed again."

Forecasters had predicted a recession in the U.S. in 2023. Instead, the economy has been solid, buoyed on the strength of the labor market, which has kept creating jobs despite higher interest rates.

Industry Breakdown

Health care employment led the way with 58,000 new jobs, followed by government (51,000), construction (23,000) and social assistance (19,000). Leisure and hospitality, which has been a top job gainer all year, added 19,000 jobs. The industry had added an average of 52,000 jobs per month over the prior 12 months.

"We're keeping an eye on the health care labor market," Yosif said. "Our data shows workforce activity in health care has been slightly up month-over-month in 8 of the 10 months of 2023, a pretty dramatic turnaround from the hiring challenges and shortages that sector saw in the two years following the depths of the pandemic."

In October, employment continued to trend up in ambulatory health care services (+32,000), hospitals (+18,000), and nursing and residential care facilities (+8,000).

"Classic recession-resistant sectors drove payroll gains in October," said Glassdoor Chief Economist Aaron Terrazas. "There was also continued strength in construction despite some signals of a slowing housing market. Employment contracted in information and in manufacturing—both the focus of strike activity."

Manufacturing posted a loss of 35,000 jobs, in large part due to the United Auto Workers strikes targeting the "Big Three" U.S. auto makers Ford, General Motors and Stellantis.

Terrazas noted that payrolls were flat in retail, "an unusually weak result for October when there is typically the first wave of holiday hiring. It's possible that retailers are waiting longer to ramp up store staffing in anticipation of an easier seasonal hiring market than over the past few years."

Unemployment Rate Ticks Up

The unemployment rate rose to 3.9 percent in October, the highest since January 2022. The number of unemployed people is 6.5 million, up 849,000 since a recent low in April.

"Though still lower than all but about 15 percent of the months going back to 1948, it is now 0.5 percentage points above its recent low of 3.4 percent in April 2023, an important psychological threshold," Terrazas said. "The increase in the unemployment rate in October was driven by permanent job losers—workers whose jobs were fully eliminated."

The labor force participation rate declined slightly to 62.7 percent, while the labor force contracted by about 200,000 workers. A more encompassing jobless rate that includes discouraged workers and those holding part-time positions for economic reasons rose to 7.2 percent.

"This month's uptick can't be waived off as a one-month aberration; it's a trend now," Bunker said. "Perhaps this rise is just a sign that the extraordinarily tight labor market of recent years is loosening. But continued upward momentum would be troubling, and hopefully this recent rise levels off as the labor market recovery continues."

Wage Growth Slowing

Average hourly earnings increased 0.2 percent in October, less than the forecast, while the 4.1 percent year-over-year gain was above expectations.

"During the past three months, average hourly earnings grew at an annualized rate of just 3.2 percent—a rate that is actually below that needed to bring inflation down to 2 percent [the Fed's goal]," Pollak said.

Terrazas added that "the path to slower, more sustainable wage gains across the economy has been frustratingly slow for policymakers concerned about long-term inflationary pressures. The downward trend should accelerate as we move into early 2024."